Your money mindset determines your relationship with money, and, to a large extent, how successful you will be in accumulating wealth.
The funny thing about money is that while we refer to it as cold, hard cash, it is capable of eliciting a wide range of emotions; happiness, fear, greed, anguish, envy, elation, to name a few. Our reactions to money depend on three primary factors; our current financial circumstances, the amount of money in question and our money mindset. Financial outcomes over the long term for lottery winners vary greatly, often as the result of differences in their money mindset. The amount of money people save during their working lives varies more than can be explained by their level of income or family circumstances. Again, it is differences in their money mindset that lead to this variation.
The development of your money mindset starts in early childhood. The financial circumstances into which you are born play a part. Starting out in life in extreme circumstances – poverty or significant wealth – can have a huge impact, although not necessarily a predictable one. For example, living in poverty can create a ‘poverty mindset’ that leads people to a belief that they are destined to a life of poverty and are not deserving of wealth. This can become a self-fulfilling prophecy. On the other hand, a background of poverty can make people more determined to achieve financial success and never again live in poverty. Sayings about money can also be a childhood influence. We can all remember sayings such as ‘money is the root of all evil’ or ‘money doesn’t grow on trees’. Hearing these sayings at a young age can influence behaviour and attitudes for a lifetime. They usually spring to mind at the time of an impulse purchase!
Good or bad financial experiences also help shape your money mindset. Failed investments, failed businesses and failed relationships can all lead to a more cautious attitude towards money. The Great Depression was a significant influence on financial attitudes and behaviour for at least two generations. On the other hand, financial success can lead to a more confident approach with money.
Your money mindset changes throughout your lifetime. Typically, young people have a more carefree attitude towards money and treat it as something that is there to be spent in order to provide instant gratification. Bringing up a family can be financially stressful as most parents want to give their children the best possible standard of living, which is often just beyond what their incomes can sustain! At this stage, money is treated conservatively with an emphasis on lifestyle consumption. Later in life, the accumulation of wealth provides a safe backdrop against which more financial risk can be taken and at this time some people take on new ventures, such as setting up a business or changing career. Then of course, in retirement, a more conservative approach is adopted because, without a good income, money lost cannot be easily replaced.
Core values are without doubt the most significant determinant of your money mindset. Respect, integrity and concern for others in society generally have a positive impact on your relationship with money. People who find pleasure in non-material things, such as spending time with friends and family or enjoying the outdoors may not become millionaires but in general have less financial stress and find it easier to save than those who aspire to a grand lifestyle filled with material possessions.
The essence of your money mindset is reflected in two key attributes; your willingness to take risk and your desire to create wealth. If there is a mismatch between these attributes and your financial goals, it will be difficult to achieve financial success in life. A person aspiring to make millions but who is unwilling to take financial risk is unlikely to succeed. Understanding your money mindset is therefore the starting point for any financial plan.